FCA working on the enforcement of guarantor repayments

In October 2016, the Financial Conduct Authority opened a consultation dealing with how guarantor lenders can reinforce repayments for guarantor loans. Specifically, this deals with the person that guarantees the loan, usually a family member, spouse or close friend who the borrower knows, trusts and agrees contractually to repay the loan if the main borrower defaults.

The issue is whether guarantors can be treated in the same way as borrowers and how much notice they need before a collection. In an ideal scenario for the lender, they would probably like to collect from the guarantor’s bank account immediately after the borrower fails to make a repayment using traditional collection methods such as a direct debit and Continuous Payment Authority. However, as part of Treating Customers Fairly, there must be a more responsible way for lenders to contact the guarantor and make a collection.

The FCA’s Consultation

1.The first option is that a lender can issue a default notice to the guarantor in accordance with section 87 of the CCA. This can consist of a formal email, phone call or letter stating that the customer has defaulted and they have an obligation to step in and make repayment in the next 14 days.

2. The second option is to get the lender to obtain the guarantor’s content for payment to be taken. The lender can notify the person in writing and give them a reasonable time to respond, such as five working days, giving the guarantor a chance to cancel the direct debit or Continuous Payment Authority, which the FCA says they have a right to cancel.

Ongoing Issues

The issues still being debated include whether a guarantor can be treated the same as a customer. Some parties argue that the guarantor is taking on a lot of the responsibility in the first place and putting their own credit score at risk (a main reason that the loan is funded) – and therefore they deserve some leniency and forbearance.

Furthermore, if a guarantor will voluntarily repay the loan when the borrower defaults, there is no reason to enforce a default payment or notice. This can be common when the customer defaults and they speak to their guarantor to make the payment to avoid any further charges. Or simply, upon being notified of the default, the guarantor may wish to quickly pay off the remaining balance because of their close relationship e.g spouse.

Alternatively, a guarantor with a different address and a more distant relationship may only hear about the default through an enforcement notice – maybe because the customer does not wish to admit to it or cause a burden. So a notification if the only way to responsibly request the money owed.

Adapted from Out-Law.

What rights do I have as a guarantor?

Once the agreement has been signed and the funds have been sent, you are legally obligated to repay the loan of the main borrower if they default on repayment. To maximise control over the loan being funded, the monies are usually sent to the guarantor’s bank account first (and they will tend to have a good credit score). So this offer a security measure for lenders but comes with a two-week cooling period where guarantors can choose to send the money to the applicant as agreed or take two weeks to reconsider and send the money back to the lender with no extra charge.

Can I switch with another guarantor?

Once the loan is open, you sadly cannot switch with another guarantor. This is because of the terms of the loan such as how much you can borrow and how long for is based largely on the details of your guarantor. For instance, whether they are a homeowner and have a good credit score will maximise your chances of being funded and borrowing the amount you need. So changing to another guarantor during the loan term would put this out of sync.

What if the guarantor has no money?

If the customer has defaulted and now payment is due from a guarantor, but that person does not have any money (maybe due to falling on hard times), some lenders will allow the payment of another party provided that they have permission. However, this is not accepted by all lenders and will have to be assessed on an individual basis.